["Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 provider; (v) maintaining or transferring records of ownership of a financial product; (8) \u201cCorporate Debtor\u201d means a corporate person who owes a debt to any person; (vi) underwriting the issuance or subscription of a financial product; or (11) \u201cDebt\u201d means a liability or obligation in respect of a claim which is due from any person (vii) selling, providing, or issuing stored value and includes a financial debt and operational or payment instruments or providing debt; payment services; (12) \u201cDefault\u201d means non-payment of debt (17) \u201cFinancial Service Provider\u201d means a person when whole or any part or instalment of the engaged in the business of providing financial amount of debt has become due and payable services in terms of authorisation issued or and is not paid by the debtor or the corporate registration granted by a financial sector debtor, as the case may be; regulator; (16) \u201cFinancial Service\u201d includes any of the following services, namely: (18) \u201cFinancial Sector Regulator\u201d means an authority or body constituted under any law for (a) accepting of deposits; the time being in force to regulate services or transactions of financial sector and includes the (b) safeguarding and administering assets Reserve Bank of India, the Securities and consisting of financial products, belonging to Exchange Board of India, the Insurance another person, or agreeing to do so; Regulatory and Development Authority of India, the Pension Fund Regulatory Authority and such (c) effecting contracts of insurance; other regulatory authorities as may be notified by the Central Government; (d) offering, managing or agreeing to manage assets consisting of financial products 3. From the foregoing definitions, it is clear that the belonging to another person; Code provides for a wide range of entities, including Banks, NBFCs, Insurance Companies, (e) rendering or agreeing, for consideration, to pension funds, and other intermediaries involved render advice on or soliciting for the in the provision of financial services. purposes of: (i) buying, selling, or subscribing to, a 4. From the combined reading of the definitions financial product; 3(16), 3(17) and 3(18) with 3(7) and 3(8), we get (ii) availing a financial service; or to understand that a Financial Service Provider, (iii) exercising any right associated with a cannot be termed as a Corporate Person, and financial product or financial service; accordingly do not fall under the ambit of (iv) establishing or operating an investment Corporate Debtor. scheme; 47 | P a g e Volume -109 August -2023","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 5. There is no second thought that the stability and Some of the important terms\/aspects of the smooth functioning of these FSPs is essential for rules are as below: maintaining the overall financial health of the economy. However, they are not immune to (a) The expressions \u201cCorporate Debtor\u201d financial distress or insolvency. wherever they occur, shall mean \u201cFinancial Service Provider\u201d; and 6. A sub-committee was constituted by the Government, seeking recommendations on the (b) The expressions \u201cInsolvency Professional\u201d, notification of the FSPs under Section 227 (zk) of \u201cInterim Resolution Professional\u201d, \u201cResolution the Code. The Committee has submitted its Professional\u201d or \u201cLiquidator\u201d, wherever they Report49 Dated: 04.10.2019, suggesting the occur, shall mean \u201cAdministrator\u201d. Tentative Distribution of FSPs for the Purpose of Applicability of the IBC, and also on the CIRP and (c) CIRP initiation: Liquidation process of FSPs. No corporate insolvency resolution process shall be initiated against a financial service 7. Following this, the Central Government, vide provider which has committed a default under Notification50 Dated:15.11.2019, had notified the section 4 of the Code, except upon an Insolvency and Bankruptcy (Insolvency and application made by the appropriate Liquidation Proceedings of Financial Service regulator, in the same manner as an Providers and Application to Adjudicating application by a financial creditor under Authority) Rules, 2019 [herein after referred to as section 7 of the Code. \u201cRules\u201d], to bring such Financial Service Providers or categories of Financial Service Providers, as (d) Appointment of Administrator: may be notified by the Central Government from On admission of the application, the time to time, under the ambit of the rules and Adjudicating Authority shall appoint the listed out the resolution process of such stressed individual proposed by the appropriate FSPs. regulator in the application as the Administrator. The Administrator shall act as 8. This rule ensures that the resolution process for an insolvency professional, interim resolution FSPs remains distinct from other corporate professional, resolution professional or entities to safeguard financial stability. liquidator, as the case may be. An Administrator shall have the same duties, functions, obligations, responsibilities, rights, and powers of an insolvency professional, interim resolution professional, resolution professional or liquidator, as the case may be, 49https:\/\/ibbi.gov.in\/uploads\/resources\/ca0c7be35204c1964 50https:\/\/ibbi.gov.in\/\/uploads\/legalframwork\/cb1d53c7fe47f 51a5f4918e08292.pdf 8f22ab36a40f441db2c.pd 48 | P a g e Volume -109 August -2023","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 while acting as such in an insolvency rules of procedure shall be such as may be resolution and liquidation proceeding of a determined by the appropriate regulator; financial service provider. (iv)The compensation paid to the Members of (e) Moratorium Period: the Advisory Committee shall be part of the An \u2018Interim Moratorium\u2019 shall commence on insolvency resolution process costs; and from the date of filing of the application till its admission or rejection. The license or (v) The Administrator shall chair the meetings registration which authorises the financial of the Advisory Committee. service provider to engage in the business of providing financial services shall not be (g) Resolution plan: suspended or cancelled during the interim- (i) The resolution plan shall include a moratorium and the corporate insolvency statement explaining how the resolution resolution process. applicant satisfies or intends to satisfy the requirements of engaging in the business (f) Advisory Committee: of the financial service provider, as per laws for the time being in force; (i) The appropriate regulator may, where deemed necessary, constitute an Advisory (ii) Upon approval of the resolution plan by Committee, within 45 days of the the committee of creditors under sub- insolvency commencement date, to advise section (4) of section 30, the Administrator the Administrator in the operations of the shall seek \u2018no objection\u2019 of the appropriate financial service provider during the regulator to the effect that it has no corporate insolvency resolution process; objection to the persons, who would be in control or management of the financial (ii) The Advisory Committee shall consist of 03 service provider after approval of the or more Members, who shall be persons of resolution plan under section 31; ability, integrity and standing, and who have expertise or experience in finance, (iii)The appropriate regulator shall without economics, accountancy, law, public policy prejudice to the provisions contained in or any other profession in the area of section 29A, issue \u2018no objection\u2019 on the financial services or risk management, basis of the \u2018fit and proper\u2019 criteria administration, supervision or resolution applicable to the business of the financial of a financial service provider; service provider; (iii)The terms and conditions of the Members (iv)Where an appropriate regulator does not of the Advisory Committee and the manner refuse \u2018no objection\u2019 on an application of conducting meetings and observance of Volume -109 August -2023 49 | P a g e","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 made under clause (ii) within 45 working (a) the financial service provider shall obtain days of receipt of such application, it shall prior permission of the appropriate regulator be deemed that \u2018no objection\u2019 has been for initiating voluntary liquidation proceedings granted. under section 59 of the Code; (h) Liquidation Process: (b) the affidavit referred to in clause (a) of sub- section (3) of section 59 shall include a The provisions of the Code relating to the declaration that the permission under clause liquidation process of the corporate debtor (a) has been obtained; shall, mutatis mutandis apply, to the liquidation process of a financial service (c) the Adjudicating Authority shall provide provider subject to the following the appropriate regulator an opportunity of modifications, namely: \u2015 being heard before passing an order for (i) The license or registration that authorises dissolution of the financial service provider under section 59. the financial service provider to engage in the business of providing financial services (j) Assets of third parties, etc.: shall not be suspended or cancelled during (i) Third-party assets or properties in custody the liquidation process, unless an or possession of the financial service opportunity of being heard has been provider, including any funds, securities provided to the liquidator; and other assets required to be held in trust for the benefit of third parties. (ii) The Adjudicating Authority shall provide the appropriate regulator an opportunity (ii) The Administrator shall take control and of being heard before passing an order for custody of third-party assets or properties \u2015 in custody or possession of the financial service provider, including any funds, (a) liquidation of the financial service securities and other assets required to be provider under section 33, and held in trust for the benefit of third parties only for the purpose of dealing with them (b) dissolution of the financial service in the manner, as may be notified by the provider under section 54 Central Government under section 227. (i) Voluntary Liquidation Process: Volume -109 August -2023 The provisions of the Code relating to voluntary liquidation process of the corporate debtor shall, mutatis mutandis apply, to the voluntary liquidation process of a financial service provider subject to the following modifications, namely:- 50 | P a g e","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 9. Vide Notification51 Dt: 18.11.2019, the Central Code, 2016, read with the Insolvency and Government, had notified the Insolvency Bankruptcy (Insolvency and Liquidation Resolution and Liquidation Proceedings of the Proceedings of Financial Service Providers and following categories of financial service providers Application to Adjudicating Authority) Rules, shall be undertaken in accordance with the 2019, (\u201cRules\u201d) and the applicable Regulations: provisions of the Insolvency and Bankruptcy Sl. Category of Financial Service Appropriate Regulator Dealing with third-party No. Provider (rule 2 of the Rules) [clause (a) of sub-rule assets (rule 10 of the (1) of rule 3 of the Rules] Rules) (1) (2) (3) (5) 1 Non-banking finance companies (which Reserve Bank of India To be notified separately include housing finance companies) with assets size of Rs. 500 crores or more, as per last audited balance sheet. 10. From the above definition, we can understand of the Sub-Committee Dated: 04.10.2019 (Supra), that a Corporate Person, undertaking the provided its recommendations on the various provision of Financial Services, under types of Financial Services Providers, to be authorisation or registration from a Financial included and excluded from the purview of the Sector Regulator, shall be called \u201cFinancial IBC provisions. Services Provider\u201d, and cannot be termed as a \u201cCorporate Debtor\u201d, to be excluded from the 12. Having said this, let us proceed to glance through general CIRP proceedings, at par with other some of the litigations which have evolved Corporate Debtors, but only to proceeded with by around FSPs, and the decision of various foras: virtue of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of A. WHERE A NBFC STOOD AS CORPORATE Financial Service Providers and Application to GUARANTOR IN RESPECT OF CORPORATE Adjudicating Authority) Rules, 2019. DEBTOR: 11. Be it as it may, the interpretation and In the matter of M\/s. Sungrowth Share and categorisation of the Financial Services, whether Stocks Limited: would fall under the \u201cFinancial Services 13. An appeal52 was preferred to the National Provider\u201d, will be the next task on hand for the Company Law Appellate Tribunal, New Delhi, Adjudicating Authorities to address. The Report against the order Dated 4-9-2019 of the National 51https:\/\/www.mca.gov.in\/Ministry\/pdf\/NotificationFSPs_181 52 [2023] 147 taxmann.com 495, NCLAT- New Delhi 12019.pdf Volume -109 August -2023 51 | P a g e","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 Company Law Tribunal, Kolkata Bench, Kolkata, of India (RBI) vide certificate of registration no. vide which an application under Section 7 of the B.05.03435, in accordance with Section 45 IA of Insolvency and Bankruptcy Code, 2016 (in short the RBI Act, 1934. The certificate was issued on 'Code') filed by State Bank of India 28.03.2001, to carry on business of NBFC, without (Financial Creditor) against M\/s. Sungrowth accepting public deposits subject to the Share and Stocks Limited (Corporate Guarantor) conditions given in the said registration on account of a default committed by the certificate. Corporate Debtor (M\/s. Adhunik Alloys & Power Limited) in paying the financial debt of 16. The application under section 7 was filed on Rs.63,04,53,226\/-, was admitted by the 08.06.2018, whereas the NBFC Registration Adjudicating Authority (National Company Law certificate Dated:28.03.2001, was cancelled on Tribunal, Kolkata Bench, Kolkata). 09.07.2018 and intimation was given to M\/s. Sungrowth Share and Stocks Limited, about it on 14. M\/s. Adhunik Alloys & Power Limited was already 11.07.2018. in Corporate Insolvency Resolution Process (CIRP) vide order dated 23-8-2017 of the 17. It was further argued that the day on which the Adjudicating Authority. M\/s SPV Bhagwati Power & Steel Ltd., the Resolution Applicant in the application under section 7 was matter, has submitted the resolution plan which has been approved by the Adjudicating Authority. filed i.e. 08.06.2018, the registration of M\/s. In the said proceedings, the State Bank of India, has submitted its claim of Rs. 324.73 Crores, Sungrowth Share and Stocks Limited, as NBFC which was though considered in the plan, and now the Respondent filed an application under was in operation, therefore, the application section 7 of the Code against M\/s. Sungrowth Share and Stocks Limited, who stood as a under section 7 of the Code was not Guarantor, to the extent of Rs.30 Crores for recovery of balance outstanding of the Corporate maintainable. Reference to Section 3(7), 3(8), Debtor (M\/s Adhunik Alloys & Power Limited). 3(17), 3(18) and Section 5A of the Code to refer 15. It was argued before the NCLAT that the application filed under section 7 of the Code was to the definitions of the Corporate Person, not maintainable and the Adjudicating Authority had no jurisdiction to initiate the proceedings Corporate Debtor, Financial Service because M\/s. Sungrowth Share and Stocks Limited was a NBFC, registered with Reserve Bank Provider, Financial sector regulator and 52 | P a g e Corporate Guarantor. It was also submitted that proceedings against the Financial Service Provider could have been initiated only in terms of Insolvency and Bankruptcy (Insolvency And Liquidation Proceedings Of Financial Service Providers And Application To Adjudicating Authority) Rules 2019, which came into force w.e.f. 15.11.2019, in terms of section 227 read with clause (zk) of sub-section 2 of 239 of the Code. Volume -109 August -2023","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 18. Decisions of the Appellate Tribunal in the matters includes the Reserve Bank of India. Financial of Randhiraj Thakur v. Jindal Saxena Financial service is defined under section 3(16) which Services (P.) Ltd53, and Housing Development according to the decision of this court in the case Finance Corporation Ltd. v. RHC Holding (P.) of Housing Development Finance Corporation Ltd54, were also relied upon. Ltd. (supra) is inclusive and not limited to one which is provided in the said provision. 19. For the Respondents, it was argued that the Appellant was not doing financial services as 21. The present proceedings have been initiated defined under section 3(16) and therefore, the against M\/s. Sungrowth Share and Stocks registration of the Appellant dated 28-3-2001 Limited, as a Corporate Guarantor. Section 5A of was cancelled vide order dated 9-7-2018\/11-7- the Code, defines Corporate Guarantor which 2018. It was further submitted that even if the means a corporate person. Accordingly, the application under section 7 of the code was filed Appellate Tribunal was of the view that from any on 8-6-2018 and at that time the certificate of angle, M\/s. Sungrowth Share and Stocks Limited, registration was in operation but it came to end having the registration in terms of section 3(17) during the pendency of the proceedings on 9-7- as financial service provider by the financial 2018\/11-7-2018, therefore, the application filed service regulator in terms of section 3(18) by RBI under section 7 of the Code by State Bank of as on 28-3-2001 which continued up to 9-7- India, was in accordance with law. 2018\/11-7-2018 cannot in any case be called a banking institution. It has to be called a non- The NCLAT observed the following: baking financial institution and in such scenario 20. Section 3(7) defines corporate person. It the application filed under section 7 of the Code on 8-6-2018 was not maintainable on that date categorically states that it will not include and therefore, the Adjudicating Authority had no any financial service provider. Section 3(8) jurisdiction to invoke its power for the purpose of defines corporate debtor, which means a initiation of CIRP proceedings. The Appellate corporate person. Meaning thereby in order to Tribunal was of the view that the Adjudicating become corporate debtor entity has to be a Authority has committed an error in initiating the corporate person but a financial service proceedings under section 7 of the Code though provider is not a corporate person. The financial it was not apprised of the facts that M\/s. service provider is defined in section 3(17) which Sungrowth Share and Stocks Limited (Corporate says that any person to whom registration is Guarantor) was a financial service provider. granted by a financial sector regulator. Section 3(18) defines financial sector regulator which 53 [2018] 94 taxmann.com 340\/2018 SCC Online NCLAT 508, 54 [2019] 107 taxmann.com 200\/155 SCL 4\/2019 SCC Online NCLAT, New Delhi. NCLAT 398, NCLAT New Delhi. 53 | P a g e Volume -109 August -2023","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 22. The Hon\u2019ble Appellate Tribunal also noted the financial creditor and an ex-parte order was decision of Hon'ble Supreme Court in the case passed by the instant Adjudicating Authority of Dr. Jagmittar Sain Bhagat v. Dir observing that notice was served on the Health Services55 , in which it has been held that corporate debtor, but there was no appearance. if the Adjudicating Authority does not have the jurisdiction to initiate the proceedings then the 27. Aggrieved by that Order, I.A. No. 45 of 2020 in the said proceedings are non-est in the eyes of law application, was filed by M\/s. AKJ Fincap Limited, and such an issue can be raised even in appeal seeking a direction to set aside the ex- also. parte Order. The Adjudicating Authority dismissed the said IA on the ground that the 23. Accordingly, the Hon\u2019ble Appellate Tribunal Tribunal has no power to review or set aside its found merit in the appeal and allowed the same, own Company Petition Admission Order57 as per thereby and the impugned order of the NCLT, was settled proposition of law. Before the NCLAT the set aside. Counsel for M\/s. AKJ Fincap Limited, strenuously argued that the Adjudicating Authority has the In the matter of M\/s. AKJ Fincap Limited: power to set aside this ex-parte Order, but has 24. M\/s. Agnipa Energo Private Limited [AEPL] erroneously dismissed the I.A. on the ground that the Order dated 18-3-2020 dealt with 'Admission approached Bank of India the financial creditor of the Application' filed under section 7. and the financial creditor agreed to sanction an aggregate loan amount of Rs.10.65 crores. The 28. Aggrieved by said order an application was filed corporate guarantor M\/s. AKJ Fincap Limited., by Corporate guarantor seeking a direction to set offered its corporate guarantee and signed and aside the ex-parte order, which was dismissed by executed the Deed of Guarantee. the Adjudicating Authority on the ground that the Adjudicating Authority had no power to review or 25. AEPL failed to pay instalments of the term loan set aside its own company petition admission account. The term loan account was classified as order as per settled proposition of law. NPA. The financial creditor issued a reminder letter to AEPL, to pay the interest and loan 29. On appeal with the National Company Law instalments. Moreover, AEPL while admitting its Appellate Tribunal, filed by Corporate Guarantor, liability submitted a One Time Settlement the ex-parte order was set aside subject to costs proposal, but the same could not be accepted by of Rs. 25,000\/- on Corporate guarantor to be paid the financial creditor. to the financial creditor and parties were directed to appear before the Adjudicating Authority. As 26. An application56 was filed under section 7 by the 55 [2013] 10 SCC 136 57 Power of NCLT to recall it own order was discussed in the 56 CP (IB) No. 04\/GB\/2020, NCLT, Guwahati Bench, December, 2022 edition of wiki, which can be accessed at https:\/\/sbsandco.com\/blog\/sbs-wiki-e-journal-dec-2022 54 | P a g e Volume -109 August -2023","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 per the order of NCLAT, Corporate Guarantor notification Dt: 18.11.2019, it was notified that paid Rs. 25,000\/- to the financial creditor and the the Non-Banking Finance Companies\u2019 including petition filed by the financial creditor under \u2018Housing Finance Companies\u2019 with assets size of section 7 was taken up by the Adjudicating 500 crores or more, the proceedings shall be Authority i.e., National Company Law Tribunal, undertaken in accordance with the provisions of Guwahati Bench, afresh. I&B Code 2016 to be read along with these rules by the appropriate Regulator through 30. During the proceedings, it is submitted to the Administrator and in the instant case Reserve Adjudicating Authority that basis the documents Bank of India is designated. submitted and agreed by both the financial creditor as well as the corporate guarantor that 32. The Adjudicating Authority noted that the the corporate guarantor is a NBFC\/Financial Corporate Guarantor is a NBFC\/ Financial Service Service Provider and Certificate is issued to this Provider and Certificate issued to this effect by effect by the RBI. The financial creditor has also the RBI dated 18\/03\/1998; The Applicant\/FC has admitted in its submission in the affidavit filed by also admitted in its submission in the affidavit it enclosing the latest balance sheet of the dated 10\/08\/2021 filed by it enclosing the latest corporate guarantor for the financial year 2019- Balance Sheet of the Corporate Guarantor for 20, downloaded from the MCA site, that the total the Financial Year 2019-2020, downloaded from assets of the corporate guarantor stands at Rs. the MCA site, that the Total Assets of the 15.63 crores only. Corporate Guarantor i.e., AKJ Fincap Ltd stands at Rs. 15.63 crores only. 31. The Tribunal also noted the provisions of section 3(7) reads that \u2018Corporate Person\u2019 means a 33. The Adjudicating Authority observed that the Company as defined in clause (20) of section 2 of Corporate Debtor before the Hon\u2019ble Tribunal is the Companies Act, 2013, a limited liability a Financial Service Provider Company as per the partnership, as defined in clause (n) of sub- above sections, rules etc., and accordingly did section (1) of section 2 of the Limited Liability not find any merit in the arguments of the Partnership Act, 2008, or any other person Counsel for the Financial Creditor. incorporated with limited liability under any law for the time being in force but shall not include 34. The Adjudicating Authority opined that the any financial service provider. The Adjudicating Applicant FC has not followed the Guidelines and Authority also noted that the Insolvency and filed this Application under section 7 of IBC in Bankruptcy (Insolvency and Liquidation respect of a Financial Service Provider without Proceedings of a Financial Service Providers and following the due process of law, and rejected the Application to Adjudicating Authority) Rules, Application. 2019 with effect from 15.11.2019, and vide 55 | P a g e Volume -109 August -2023","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 35. While rejecting the Application, the Adjudicating 38. It was further claimed that after setting off the authority made clear that though the Application amounts to the account of the Corporate debtor, filed under section 7 of IBC is rejected but the there was a debit balances, to be received from order of rejection will not affect the right of the the Corporate Debtor. The Operational Creditor Applicant to seek recourse, if otherwise eligible, claimed that Notice Dt:21.12.2017 was sent to before other forum(s) as the Petitioner may the Corporate Debtor claiming outstanding Rs. determine to proceed. 28,90,835.10 with interest. However, the amount was not paid. Subsequently, Notice under section B. FAILURE\/CONCEALMENT ON THE PART OF THE 8 was also issued on 15.03.2018. The Operational CORPORATE DEBTOR TO DISCLOSE HIS STATUS Creditor then filed Application under section 9 for AS FINANCIAL SERVICE PROVIDER IN KYC the debt due and in default, and the Adjudicating SUBMITTED TO THE FINANCIAL CREDITOR: Authority admitted the application. In the matter of M\/s Arkay International Finsec 39. It was submitted before the NCLAT that Appellant Limited: is NBFC which is exempted from the purview of \\\"Corporate Person\\\" under section 3(7) of the 36. An appeal58 was preferred to the National Insolvency and Bankruptcy Code, 2016. The Company Law Appellate Tribunal, New Delhi, by a Certificate of the Registration held by the shareholder of M\/s. Arkay International Finsec Appellant along with the returns filed till date, Ltd, against the order IA No. 203\/JPR\/2019 IB - were submitted to the Appellate Tribunal. 596(ND)\/2018 TA No. 116\/201859, of the National Company Law Tribunal, Jaipur Bench, vide which 40. It was further submitted to the Appellate Tribunal an application under Section 9 of the Insolvency that the Adjudicating Authority noted the above and Bankruptcy Code, 2016 (in short 'Code') filed facts in the Impugned Order but still went ahead by M\/s. Aditya Birla Money Ltd against M\/s. Arkay to analyse that in KYC form which was submitted International Finsec Ltd, (Corporate Debtor) was by the Company to the Operational Creditor, it admitted by the Adjudicating Authority (National was not stated that the Corporate Debtor was Company Law Tribunal, Jaipur Bench, Jaipur). NBFC. 37. It was claimed by the Operational Creditor, that 41. On behalf of the Operational Creditor, a copy of the Corporate Debtor availed the services of the the KYC Form, to submit that the Corporate Operational Creditor and had opened a trading Debtor claimed to be \\\"Pvt. Ltd. Company\\\" instead account No. 1070913 through its Branch Office at of selecting the Column \\\"Financial Institution\\\". Jaipur and started trading from September, 2017 and continued till November, 2017. 42. The Hon\u2019ble Appellate Tribunal relied on the 58 [2021] 128 taxmann.com 422, NCLAT, New Delhi Bench 59 [2020] 116 taxmann.com 328 NCLT, Jaipur Bench Volume -109 August -2023 56 | P a g e","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 provisions of Section 3(7) of the code, and the \\\"any financial service provider\\\". Considering the learned Counsel for the Corporate Debtor Certificate issued by the Reserve Bank of India submitted that there is no amendment to section and also documents as placed on record by the 3(7) of IBC and the Corporate Debtor is still Appellant - Corporate Debtor, we have no protected from application of provisions of IBC in hesitation to hold that the Corporate Debtor in view of said definition. the present matter on date of Application being financial service provider, the provisions 43. The Appellate Tribunal\u2019s attention was invited to of IBC could not have been invoked against the the order of the Hon\u2019ble Adjudicating Authority, Corporate Debtor. It would not be in the realm wherein it had taken note of the conduct of the of Adjudicating Authority and thus, for this Corporate Debtor in concealing the information Tribunal to go into the details whether the in the KYC. conditions attached have been followed or not by the NBFC as held in the matter 44. The Hon\u2019ble Appellate Tribunal took note of the of HDFC (supra). If there is any violation of Corporate Debtor\u2019s Certificate of NBFC conditions, the aggrieved person may bring it to registration no. 10.00021; Dated: March 3, 1998, the notice of RBI to look into the same. issued by Reserve Bank of India, and Reserve According to us, whenever the Corporate Debtor Bank of India letter No. 244\/09-10-207\/2019-20, demonstrates that it is financial service informing about the filing of the returns upto provider and supports the claim with evidence date by the Corporate Debtor. by Certificate by Reserve Bank of India, it is appropriate for the Adjudicating Authority to lay 45. The learned Counsel for the Appellant has relied off its hands from such Corporate Debtor on Judgement of Appellate Tribunal in the matter considering the definition of \\\"Corporate of \\\"Randhiraj Thakur v. Jindal Saxena Financial Person\\\", under section 3(7).\\\" Services (P.) Ltd; and also on Judgement of the Appellate Tribunal in the matter of \\\"Saumil A. 46. After hearing both the parties, the Hon\u2019ble Bhavnagri v. Nimit Builders (P.) Ltd60. , wherein, Appellate Authority, was of the view that the the Bench made the following observations: Adjudicating Authority could not have initiated CIRP, when the Corporate Debtor did not fall in \\\"This Bench finds itself in agreement with the the concerned definition of 'Corporate Person' law as explained by the Division Bench of this under IBC. Under section 3(8) \\\"Corporate Debtor\\\" Tribunal (to which one of us - Justice A.I.S. means a corporate person who owes a debt to Cheema was also Member). The definition of any person. The Application could not have been Corporate Person in Section 3(7) of IBC admitted as if by way of punishment for specifically provides that it shall not include 60 [2020] 114 taxmann.com 55\/158 SCL 133, NCLAT, New Delhi Volume -109 August -2023 Bench 57 | P a g e","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 concealing a particular fact in KYC. The conduct of (b) In the matter of Punjab National Bank (FC) the Corporate Debtor may attract any other vs. Asharam Leasing and Finance Private action which the Operational Creditor may take. Limited (CD)62, before the National Company However, when it comes to invoking provisions of Law Tribunal, Kolkata Bench; IBC, if the law has protected the financial service provider, IBC could not have been invoked in the (c) In the matter of Randhiraj Thakur (for CD) vs. manner in which it has been done, and according Jindal Saxena Financial Services Private allowed the Appeal, and the Impugned Order of Limited and another (FC)63 before the the Adjudicating Authority was set aside, thereby National Company Law Appellate Tribunal, Section 9 application of IBC filed by Operational New Delhi Bench; Arising out of order dated Creditor, against the Corporate Debtor, was 8th January, 2018 passed by National dismissed, with consequential orders arising Company Law Tribunal, New Delhi Bench in thereof. C.A. No. 233(PB)\/2017 in C.P. No. (IB)- 84(PB)\/201764-Jindal Saxena Financial 47. Similar views were taken by the Adjudicating Services Private Limited vs. M\/s. Mayfair Authorities and the Appellate Authorities in the Capital Pvt. Ltd. below mentioned cases, in connection with initiation of CIRP wherein corporate debtor was (d) In the matter of Innovators Facade Systems a person engaged in business of providing Limited (OC) vs. Reliance Commercial financial services in terms of registration granted Finance Limited (CD)65, before the National to it by Reserve bank of India, in view of section Company Law Tribunal, Mumbai Bench; 3(7), thereby they do not come within meaning of corporate person to whom provisions of Code (e) In the matter of Thirdwave Fiscal & were applicable and accordingly the CIRP Investment Services Pvt. Limited (FC) vs. applications filed against corporate debtors held Amit Vanijya Private Limited (CD)66, before was not maintainable: the National Company Law Tribunal, Kolkata Bench. (a) In the matter of Mrs. Parveen Chawla (OC) vs. MCF Finlease (P.) Ltd (CD)61, before the C. SUO MOTO INITIATION OF CIRP BY THE RESERVE National Company Law Tribunal, New Delhi BANK OF INDIA, BASIS THE CREDIT Bench; INFORMATION AVAILABLE WITH IT, THAT THE FINANCIAL SERVICE PROVIDER, HAD COMMITTED DEFAULTS OF SIGNIFICANT AMOUNT IN RELATION TO FINANCIAL DEBT 61 141 taxmann.com 383, NCLT, New Delhi Bench - IB- 64 [2018] 90 taxmann.com 127, NCLT, New Delhi Bench 788\/ND\/2020 65 2019 SCC OnLine NCLT 29123, NCLT, Mumbai Bench 62 [2021] SCC OnLine NCLT 11444, NCLT, Kolkata Bench 66 2023 SCC OnLine NCLT 278, NCLT, Kolkata Bench - C.P.(IB) 63 [2018] 98 taxmann.com 192, NCLAT, New Delhi Bench No. 340\/KB\/2021 58 | P a g e Volume -109 August -2023","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 AVAILED BY IT FROM FINANCIAL CREDITORS 52. The relevant documents were placed before the AND DEFAULT WAS MORE THAN MINIMUM Adjudicating Authority. The documents THRESHOLD AMOUNT AS STIPULATED UNDER demonstrate that the account is in default with SECTION 4(1): the status of \\\"SMA-2\\\", which means that the interest of principal has been overdue and 48. An application67 was filed by the Reserve Bank of remains unpaid for a period in excess of 60 days India (\u201cAppropriate Regulator\u201d) under section calculated in accordance with the RBI Master 227 read with section 239(2(zk) of the Insolvency Circular on Prudential Norms on Income and Bankruptcy Code, 2016, for initiation of CIRP Recognition, Asset Classification and Provisioning against M\/s. SREI Infrastructure Finance Limited pertaining to advances. E-mail communication (SIFL), the Financial Service Provider. evidencing classification of SIFL as a Red Flag Account by UCO Bank. 49. Before the Hon\u2019ble Adjudicating Authority, it was averred on behalf of the Appropriate 53. RBI vide its notification dated 04\/10\/2021, in Regulator\/RBI, that on the basis of credit exercise of its powers under section 45-IE of the information available to it, the RBI came to the Reserve Bank of India Act, 1934 has superseded conclusion that SIFL has committed defaults of the Board of Directors of SIFL and appointed Mr. significant amount in relation to the financial Rajneesh Sharma as the Administrator. It has also debt availed by it from various financial creditors; constituted a three-member Advisory Committee to assist the Administrator of SIFL in the discharge 50. In particular, UCO Bank has intimated vide its of its duties. The RBI has proposed the same letter Dt: 07.10.2021, that the amount claimed to person to be appointed as the Administrator of be in default in relation to working capital the Corporate Debtor. demand loan facility is Rs. 165,56,30,967.99. Of this the principal amount due is to the tune of Rs. 54. On behalf of the Appropriate Regulator, it was 150.00 crore and the interest amount due is to submitted that in view of the huge default the tune of Rs. 15,56,30,967.99. committed by the respondent\/FSP, there was a need to initiate CIRP against the respondents 51. Date of default with reference to repayment of with speed, and according urged the Adjudicating principal sum is stated to be 13\/02\/2021. The Authority to pass appropriate orders default with reference to the interest amount is expeditiously keeping in view the public interest stated to be 01\/11\/2020. During the course of in the matter. hearing, it was submitted that this was the earliest date of default, and that there are continuing defaults since then. 67 [2021] 133 taxmann.com 180, NCLT, Kolkata Bench -CP (IB) Volume -109 August -2023 No. 295\/KB\/2021 59 | P a g e","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 55. The Adjudicating Authority was also informed 59. On perusal of the documents and records, the that the challenge to the notification dated Adjudicating Authority was of the view that 04\/10\/2021 issued the RBI, in Writ Petition68, was records prima facie prove that there has been a dismissed by the Hon'ble Bombay High default and that the sum involved in such default Court vide order dated 07\/10\/2021. is in excess of the threshold limit of one crore rupees prescribed at present under section 4(1) 56. The process of CIRP was discussed and of the Code. Moreover, since the sanction letters accordingly, pursuant to Rule 5(a)(i) of the are in the year 2018 onwards and date of default Insolvency and Bankruptcy (Insolvency and from November 2021, the petition is not hit by Liquidation Proceedings of Financial Service limitation, and accordingly, satisfied that the case Providers and Application to Adjudication is a fit case for initiation proceedings under Authority) Rules, 2019, no CIRP shall be initiated section 227 read with rule 5 of the Rules ibid, against an FSP which has committed a default since the debt in question qualifies under section 4, except upon an application made as financial debt under section 5(8) read with by the appropriate regulator in accordance with section 3(11) of the Code. rule 6. Sub-clause (ii) thereof which specifies that an application under sub-clause (i) shall be dealt 60. The Adjudicating Authority also noted that with in the same manner as an application by RBI vide its notification dated 04\/10\/2021 has a financial creditor under section 7. superseded the Board of SIFL and appointed Mr. Rajneesh Sharma, ex-Chief General Manager, 57. Accordingly, the first requisite to be seen by the Bank of Baroda as the Administrator. The RBI has Adjudicating Authority is whether present proposed the name of Mr. Rajneesh Sharma as petition satisfies the ingredients of section 7 of the Administrator of the Corporate Debtor. He the Code. For this the existence of debt and has also filed his written consent in Form 2 to act default are required to be proved to the as such Administrator. The Adjudicating Authority satisfaction of the Adjudicating Authority. The directed the Administrator to file to file a fresh Adjudicating Authority was briefed of the debt Form 2 with his unconditional consent to act as and default, the total amount of the default being Administrator, as the one filed along with the in excess of limits prescribed under section 4 of petition were loaded with conditions relating to the Code i.e., Rs.1 Crore presently his engagement. 58. Further the Adjudicating Authority was also 61. After filing the Petition to be in order, the informed that the present petition is also not hit Adjudicating Authority made the following by limitation. orders: 68 Writ Petition (Lodging) No. 22872\/2021, before the Hon'ble Volume -109 August -2023 Bombay High Court 60 | P a g e","Insolvency Proceedings Against \u2018Financial Service Provider\u2019 under the IBC, 2016 a. The Petition bearing CP (IB) No. 295\/KB\/2021 unconditional consent in Form 2 to act as such filed by the Reserve Bank of India, the Administrator. The Administrator shall carry Appropriate Regulator, under section 227 of out his functions as contemplated by sections the Code read with rule 5 of the Insolvency & 15, 17, 18, 19 and 20 of the Code. Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and f. During the CIRP period, the management of Application to Adjudicating Authority) Rules, the Financial Service Provider shall vest in the 2019 for initiating Corporate Insolvency Administrator. The officers and managers of Resolution Process against SREI Infrastructure the Financial Service Provider shall provide all Finance Limited [CIN: L29219WB1985- documents in their possession and furnish PLC055352], the Financial Service Provider, is every information in their knowledge to the hereby admitted. Administrator within one week from the date of receipt of this Order, failing which coercive b. There shall be a moratorium in terms of steps will follow. section 14 of the Code in respect of Financial Service Provider. g. The Registry is hereby directed to communicate this Order to the c. The moratorium shall have effect from the Petitioner\/Reserve Bank of India and the date of this order till the completion of the Administrator by Speed Post, e-mail CIRP or until this Adjudicating Authority immediately. approves the resolution plan under section 31(1) of the IBC or passes an order for 62. Additionally, the Administrator shall serve a copy liquidation of the Financial Service Provider of this Order on the Registrar of Companies, West under section 33 of the Code, as the case may Bengal, Kolkata by all available means for be. updating the Master Data of the Financial Service Provider. The said Registrar of Companies shall d. A public announcement of the CIRP shall be send a compliance report in this regard to the made immediately as specified under section Registry of this Court within seven days from the 13 of the Code. date of receipt of a copy of this order. e. In terms of rule 5(a)(iii) of the Rules ibid, Mr. Volume -109 August -2023 Rajneesh Sharma, 17-B, Shanaz Apartments, 90 Napean Sea Road, Mumbai 400006, e-mail id: [email protected]; [email protected], is hereby appointed as Administrator of the Financial Service Provider to carry out the functions as per the Code, subject to his filing his 61 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. Along with new legislations come interpretation issues on the various aspects involved therein. The landmark legislation of Insolvency and Bankruptcy Code (IBC) is not an exception to the same. Enacted in 2016, with an aim to streamline and expedite the resolution process for distressed companies, it has given rise to various interpretational issues, which have been mostly settled by the Adjudicating Authorities, Appellate Authorities, and thereon by the Apex Court. As the saying goes, \u201cevery day is a new learning\u201d, cases filed before the Adjudicating Authorities, followed by the Appellate Authorities, bring to table the debate on peculiar aspects in the already settled issues. The Article is an attempt to understand such intricate issues in the Code, taking the assistance settled cases and the view taken by the Adjudicating Authorities, Appellate Authorities followed by the Apex Court. -Contributed by CS D V K Phanindra & CA Sri Harsha [email protected] 1. The Insolvency and Bankruptcy Code (IBC) is a settled provisions. In this Article an attempt is landmark legislation that revolutionized India's made to discuss on the some of such issues, insolvency and bankruptcy framework. Enacted settled through recent case laws. in 2016, the IBC aimed to streamline and expedite the resolution process for distressed companies A. On the issue of \u201cTHRESHOLD LIMIT\u201d: while protecting the interests of all stakeholders 2. An Appeal69 was preferred before the Hon\u2019ble involved. There are some key terms\/concepts, which are the core to the IBC law, some of them National Company Law Appellate Tribunal being \u201cDebt\u201d, \u201cDefault\u201d, \u201cDispute\u201d, \u201cClaim\u201d, (NCLAT), New Delhi Bench, arising out of the \u201cThreshold\u201d. In relation to most of the definitions Order70 Dt: 04.04.2022, of the Hon\u2019ble National \/concepts\/terms, the law is well settled. As the Company Law Tribunal, Mumbai Bench, by the law is evolving, there emanate many scenarios, suspended Director of the Corporate Debtor which require the necessity to re-visit the already M\/s. Vatsalya Builders and Developers Private Limited, wherein CIRP (Corporate Insolvency 69 Comp. App. (AT) (Ins.) No. 498 of 2022, New Delhi Bench 70 CP (IB) No. 725 (MB) 2021, NCLT, Mumbai Bench. (Prafulla Purushottamrao Gadge v. Narayan Mangal) Volume -109 August -2023 62 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. Resolution Process) was initiated against the terms of payment of debt. The Tribunal Corporate Debtor for the default of concluded that the nature of Debt is a \u201cFinancial Rs.78,65,000\/. Debt\u201d as defined under section 5(8) of the Code, and there is a \u201cDefault\u201d as defined under section Facts of the case: 3(12) of the Code on the part of the Corporate 3. During October, 2019, Mr. Narayan Mangal, the Debtor. Further the Petition was also well within the period of limitation, and vide order Dt: Financial Creditor filed an Application71 under 04.04.2022, admitted the application and put the Section 7 of IBC for an amount of Rs.63,20,388\/- Corporate Debtor to CIRP. against M\/s. Vatsalya Builders and Developers Private Limited. During the course of the Before the NCLAT: proceedings, both the parties came to a settlement, and to this effect, entered in a 6. At the appeal stage, the Corporate Debtor, Settlement Agreement Dt; 12.12.2019. The same submitted that the application of the Financial was informed to the NCLT, Mumbai Bench, and Creditor Dt: 25.06.2021 under Section 7 has to the case was dismissed as withdrawn on fulfil the requirements of threshold as introduced 13.12.2019. by Notification dated 24.03.2020, and the Adjudicating Authority has not adverted to the 4. In the meanwhile, the Central Government vide said issue and has admitted the Application. Notification Dt: 24.03.2020, has increased minimum threshold limit of default from 7. Provisions of Clause 12 of the Settlement Rs.1,00,000\/- to Rs.1,00,00,000\/, for the purpose Agreement were referred during the arguments, of filing an Application under Part-II of the IBC. where it was mentioned that in event, any default is committed in the Settlement Agreement, the 5. Since the settlement terms were not honoured by Financial Creditor shall be liberty to initiate fresh the Corporate Debtor, Mr. Narayan Mangal, the legal proceedings under Section 7. Financial Creditor, filed another application on 25.06,2021, under Section 7 of IBC for an amount 8. It was further submitted before the Appellate of Rs. 78,65,000\/-. During the course of the Tribunal that, post the withdrawal order, the hearing, on behalf of the Corporate Debtor, the Financial Creditor had filed an Interlocutory execution of the said Settlement Agreement Application (I.A) No. 1128\/2020, for restoration between the parties, was denied. However, the of the Section 7 Application, withdrawn on Tribunal noted that there was a breach of consent 13.12.2019. The Adjudicating Authority rejected terms by the Corporate Debtor and the same is the IA and refused to restore the earlier Section 7 established by the fact that the post-dated Application, as the said order has become final. cheques were bounced and there is a default in 71 C.P. (IB)\/3701(MB)2019, NCLT, Mumbai Bench. Volume -109 August -2023 63 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. 9. On behalf of the Financial Creditor, it was Financial Creditor shall be liberty to initiate fresh submitted that the Application Dt:25.06.2021, is proceedings under Section 7, but the same shall in continuation of the earlier Application filed by be subject to the compliance of the provisions of him which was later withdrawn, 2019 when no the Law. threshold of one Crore was applicable as the increased threshold was only introduced on B. In case of Operational Creditor (OC), \u201cHOW TO 24.03.2020. Accordingly the Section 7 ARRIVE AT THRESHOLD\u201d, i.e., only PRINCIPAL or Application was maintainable. PRINCIPAL + INTEREST: Findings and Order by NCLAT: 13. An Application72 was under Section 9 of the Insolvency and Bankruptcy Code, 2016 read with 10. The Appellate Tribunal did not agree with the rule 6 of the Insolvency and Bankruptcy submissions of the Financial Creditor that the (Application to Adjudicating Authority) Rules, Section 7 filed on 25.06.2021, is in continuation 2016, by M\/s. Plastofab (Operational Creditor), to earlier filed Section 7 application, which was seeking to initiate Corporate Insolvency withdrawn. Resolution Process (\u201cCIRP\u201d) against M\/s. Electroteknica Switchgears Private Limited 11. The Appellate Tribunal held that the Adjudicating (\u201cCorporate Debtor\u201d). Authority committed error in admitting the Application under Section 7 by the Financial Facts of the case: Creditor as the same was not fulfilling the 14. Pursuant to an agreement between the threshold of Rs.1 Crore, introduced by Notification dated 24.03.2020. Corporate Debtor and the Operational Creditor, there are was an arrangement for supply of Epoxy 12. The Appellate Tribunal while setting aside the resin molded component and instrument Order Dt: 04.04.2022, had stated that it has gone transformer for switchgear. in to the merits of the contentions of the parties and the Appeal was allowed only on the ground 15. Accordingly, various invoices were raised by the of not fulfilling the threshold of Application under Operational Creditor between 26.11.2012 and Section 7. The Appellate Authority further of the 28.11.2013, which were received by the view that the provisions of Clause 12 of the Corporate Debtor without demur. However, the Settlement Agreement Dt: 12.12.2019, provide to Corporate Debtor failed to make full payment of the Financial Creditor, that in the event of any the sums due thereunder. In or around 2012, default, is committed in the Settlement hundis were sent by the Corporate Debtor for Agreement, by the Corporate Debtor, the encashment by the Operational Creditor towards payment of the said dues, however, the same 72 (2022) ibclaw.in 358 NCLT; NCLT, Kolkata Bench - CP(IB) No. Volume -109 August -2023 62\/KB\/2021 64 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. were not encashed due to insufficient funds. United Concepts and Solutions Private Limited73, 16. A Demand Notice Dt:23.06.2015, was issued to was relied upon by the Corporate Debtor. the Corporate Debtor, thereby demanding the 19. Further, the Corporate Debtor has claimed that repayment of Rs. 65,42,956\/- along with interest the instant petition is barred by limitation and @ 18%. Thereafter, a letter of acknowledgement that the demand notices under section 8 of the dated 21.07.2015 was sent by the Corporate Code were not delivered to it. The Corporate Debtor for negotiation to mutually settle the old Debtor has claimed that no email regarding the dues. The parties reached a settlement for same was delivered to it and the postal receipts repayment of dues by the Corporate Debtor. A of the physical notices indicate that the said balance of confirmation was issued by the notices were returned to GPO Kolkata Corporate Debtor on 31.03.2016 and thereafter a confirmation of dues was issued by the Corporate Findings and Order by NCLT: Debtor on 01.08.2017. 20. The Adjudicating Authority observed that the 17. Subsequently, demand notices under Section 8 of Operational Creditor had arrived at the threshold the Code was issued by the Operational Creditor of Rs. 1 Crore, by clubbing together the principal on 20.11.2020, and 25.11.2020 and the said sum of Rs. 45,33,363\/- and the interest of Rs. notices were successfully delivered to the 68,23,688\/-. The Adjudicating Authority relied on Corporate Debtor. the decision of the NCLT, New Delhi in the matter of CBRE South Asia Private Limited vs. M\/s. 18. During the hearing, it was averred on behalf of United Concepts and Solutions Private Limited, the Corporate Debtor that effective from wherein it was held that: 24.03.2020, the threshold limit to institute CIRP \u201c-------it can be inferred that the \u2018interest\u2019 can be proceedings has been increased from Rs.1 lakh to claimed as the financial debt, but neither there Rs.1 Crore. Since the petition was filed after is any provision nor there is any scope to include 24.03.2020 and in the instant petition, the the interest to constitute as the operational principal amount in default was Rs. 45,33,363\/-. debt.\u201d It was averred by the Corporate Debtor that the Operational Creditor has used the interest 21. In reply to the contentions of the Operational component being Rs. 68,23,688\/- to make the Creditor that since the date of default precedes total debt due cross the threshold of Rs. 1 Crore. 24.03.2020, the limit of Rs. 1 Crore shall not be The decision taken by Learned National Company applicable to the instant petition, the Law Tribunal (NCLT), New Delhi in the matter of Adjudicating Authority, relied on the judgement M\/s. CBRE South Asia Private Limited vs. M\/s. of Hon\u2019ble NCLAT in the matter of Jumbo Paper 73 CP(IB)- 797(ND)2021, NCLT, New Delhi Bench. Volume -109 August -2023 65 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. Products vs. Hansraj Agrofresh Pvt. Ltd.74, C. In case of Financial Creditor (FC), can \u201cONLY wherein at Para 10 of the said Order, the Hon\u2019ble INTEREST ON AN ALREADY REPAID DEBT\u201d, NCLAT held that: constitute \u201cDEBT\u201d, \u201cCLAIM\u201d AND \u201cTHRESHOLD\u201d: \u201c10. The other judgments cited by learned 23. A Joint Application75 was filed by M\/s. Saraf Chits Counsel for Appellant broadly lay down that Private Limited and M\/s. VKSS International any statute\/law can be applied retrospectively Private Limited, (Financial Creditors) under the only if explicit provision regarding its Section 7 of the Insolvency and Bankruptcy Code, retrospective application is made in the 2016 (for brevity, the \u2018IBC, 2016\u2019) read with Rule statute. It is seen that notification dated 4 of the Insolvency and Bankruptcy (Application 24.3.2020 (supra) makes it unambiguously to Adjudicating Authority) Rules, 2016 against clear that the threshold limit to be considered M\/s. KAD Housing Private Limited (\u201cCorporate for section 9 application will be Rs. 1 crore. This Debtor\u201d). threshold limit will be applicable for application filed u\/s 7 or 9 on or after 24. The total unpaid Financial Debt claimed by the 24.3.3020 even if debt is of a date earlier than Applicants amounted to Rs.1,76,04,484\/- and the 24.3.2020. Since the application under section date of default is in July, 2019. 9 which is the subject matter of this appeal was filed on 13.9.2020, therefore the 25. During the submissions, it was stated on behalf of threshold limit of Rs. 1 crore of debt will be the Financial Creditors that the principal amount applicable in the present case.\u201d of Rs 1.5 Crore in respect of M\/s. Saraf Chits Private Limited, was already been paid by the 22. Accordingly, the Adjudicating Authority without Corporate Debtor and only an amount of Rs. 64 going in to the merits of the Section 9 Application, lakh is left to be paid towards the interest held that the interest component cannot be component. clubbed with the Principal Debt to arrive at the minimum pecuniary threshold of Rs. 1 Crore. The 26. The Adjudicating Authority directed the Adjudicating Authority further held that the Applicants, to convince the Bench on the threshold limit of Rs. 1 Crore will be applicable for maintainability of the application since, the applications filed under Section 7 or 9 of the defaulted amount subsisting has been less than Code, on or after 24.3.3020 even if the date of Rs. 1 Crore. In response, the Applicants stated default precedes 24.3.2020, and is accordingly that the term \u201cfinancial debt\u201d as defined under dismissed the petition. Section 5(8) of IBC, 2016 includes the interest component, and as the Principal component was repaid during the pendency of the suit, their 74 Company Appeal (AT) (Ins) no. 813 of 2021, NCLAT, New 75 (IB)-255(ND)\/2021, NCLT, New Delhi Bench. Delhi Bench. Volume -109 August -2023 66 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. application is maintainable. or Liquidation of the \u2018Corporate Debtor\u2019 and which is barred in view of Section 65 of the I&B Code..\u201d 27. On the other hand, the Corporate Debtor averred that since the principal amount has been paid by 31. Concurring with the decision of the Hon\u2019ble the Corporate Debtor, the petition needs to be NCLAT, the Adjudicating Authority inferred that dismissed. the \u201cinterest\u201d component alone cannot be claimed or pursued, in absence of the debt, to Findings and Order by NCLT: trigger a CIR process against the corporate Debtor. Further, the Adjudicating Authority also 28. On considering the above, the issue before the of the view that the application pursued for Adjudicating Authority, was \u201cWhether the CIRP realization of the interest amount alone is against can be initiated \/ triggered solely on the basis of the intent of the IBC, 2016, and dismissed the the un-paid amount of interest when the entire Application. principal amount of debt has been discharged by the Corporate Debtor?\u201d. D. In case of Financial Creditor (FC), can \u201cONLY INTEREST WHICH FELL DUE AND PAYABLE\u201d 29. The Adjudicating Authority discussed the constitute a \u201cDEFAULT\u201d, even though the definition \u201cfinancial debt\u201d as defined under Principal amount was not due: Section 5(8), \u201cDebt\u201d, defined in Section 3 (11) and \u201cClaim\u201d defined in Section 3 (6) of IBC, 2016. 32. An Appeal77 was preferred before the Hon\u2019ble National Company Law appellate Tribunal 30. Reliance was also placed by the Adjudicating (NCLAT), New Delhi Bench, arising out of the Authority to Judgment of Hon\u2019ble NCLAT in the Order78 Dt: 23.05.2022, of the Hon\u2019ble National matter of S. S. Polymers v. Kanodia Technoplast Company Law Tribunal, New Delhi Bench, by Ltd.76, wherein, the NCLAT opined as follows: which an application filed by the Appellant under Section 7 of the Insolvency and Bankruptcy Code, \u201c5. Admittedly, before the admission of an 2016 (in short \u2018Code\u2019) has been dismissed on the application under Section 9 of the I&B Code, the ground that amount of interest only claimed by \u2018Corporate Debtor\u2019 paid the total debt. The the Appellant is not covered by the definition of application was pursued for realisation of the financial debt and the application under Section interest amount, which, according to us is against 7 of the Code is not maintainable. the principle of the I&B Code, as it should be treated to be an application pursued by the Applicant with malicious intent (to realise only Interest) for any purpose other than for the Resolution of Insolvency, 76 Company Appeal (AT) (Insolvency) No. 1227 of 2019, NCLT, 77 Company Appeal (AT) (Ins.) No. 882 of 2022, NCLAT, New New Delhi Bench Delhi. 78 IP-121\/ND\/2022, NCLT, New Delhi Bench. 67 | P a g e Volume -109 August -2023","Important aspects in IBC Law - Revisited through recent judgements. Facts of the case: defaulted amount of interest. 33. The Financial Creditor was a Debenture holder of 37. The Adjudicating authority referred to many the Corporate Debtor, and the said Debentures definitions under the Code, and placed reliance were to be redeemed by 31.03.2026. However, on Section 5(8) of the Code, wherein it is seen the same may be redeemed by the Corporate that \u201ca Debt along with interest, if any, which is Debtor at any time, and can be requested for disbursed against the consideration for the time redemption by the Financial Creditor after the value of money comes under the definition of expiry of 1 year of the issue of the Debenture financial debt and includes various other items Certificate. As per the terms of the issue of mentioned therein. Debenture, the Debenture holder was entitled to get interest @ 6% per annum payable on face 38. To initiate CIRP under Section 7 of the code, the value plus security premium on quarterly rests. prime consideration is that there must be existence of debt and only thereafter interest 34. The interest and security premium were due and shall be added in the principal debt amount. The payable on 01.07.2021, 01.10.2021 and Adjudicating Authority was of the view that since 01.01.2022, we re not paid by the Corporate in the present case, the Principal amount did not Debtor. Accordingly, an application was filed for become due and payable, there is no debt due the default of interest amount for the period of 3 and payable. Accordingly, there is no default in quarters for the FY 2021-22. the payment of the amount, and only interest amount claimed by the applicant, does not come Before the NCLT: under the definition of Financial Debt, and dismissed the Application of the Financial 35. On behalf of the Corporate Debtor, it was averred Creditor as not maintainable. Aggrieved, the that the debt claimed by the Financial Creditor is Financial Creditor preferred the appeal. only the interest amount and not the Principal amount, and as the Principal amount is not due, Before the NCLAT: the same shall not constitute a Financial Debt. 39. Before the Appellate Tribunal on behalf of the 36. The Adjudicating Authority perused through the Financial Creditor it was argued that an Debenture issue terms and found that the application under Section 7 of the Code shall be Financial Creditor has the right to seek for maintainable even on the component of interest redemption of the Debenture along with Security if it crosses the threshold limit being part of the Premium and interest, after the expiry of 1 year financial debt. In this regard, it is submitted that of the issue of the Debenture Certificate. the financial debt is a debt with interest if any, However, in the present case the Financial disbursed against the consideration for the time Creditor has not claimed for the Principal amount value of money and includes debentures. which is due and payable, but only for the Volume -109 August -2023 68 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. Reliance was placed to the decision of the respect of the component of interest which Hon\u2019ble Supreme Court in M\/s Orator Marketing became due and payable, without asking for the Pvt. Ltd. Vs. M\/s Samtex Desinz Pvt. Ltd.79, principal amount which has not yet become due wherein has held that interest free loan is a and payable, only if the financial creditor has to financial debt and the application under Section show the \u201cdefault\u201d as a condition precedent. 7 was held to be maintainable. It is submitted that on the same analogy the interest which became 42. Accordingly, allowed the appeal filed by the due and payable would attract the provisions of Financial Creditor, and setting aside the order of Section 7 of the Code. the Adjudicating Authority. 40. On behalf of the Corporate Debtor, it was argued that as per the scheme of the Code, the financial debt means the debt along with interest and not the interest independently and further submitted that Adjudicating Authority was correct in rejection the application of the Financial Creditor. It is also argued that the decision in the case of M\/s Orator Marketing Pvt. Ltd. (supra), relied upon by the Appellant is not applicable because it deals with the aspect of principal amount though advanced without interest which had become due and payable. Findings and Order by NCLAT: 41. The Appellate Tribunal referred to the relevant definitions appearing in Part I and Part II of the Code, and explaining the scheme with the help of the decision in the case of Innovative Industries Ltd80, and taking a cue from the decision of the Hon\u2019ble Supreme Court in the case of M\/s Orator Marketing Pvt. Ltd. (Supra), the Appellate Tribunal was of the opinion that in the facts and circumstances, the application filed under Section 7 of the Code could be maintained in 79 Civil Appeal No. 2231 of 2021 80 (2018) 1 SCC 407 August -2023 Volume -109 69 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. OTHER RELEVANT JUDGEMENTS: In line with the above, there are some other cases, which were decided by the Adjudicating Authority\/Appellate Authorities, the gist of which are provided below. Sl. No. Nature of Claim\/Debt\/Default Decision of the Adjudicating Authority Whether non deposit of TDS amount to The NCLT81 held that the same to be treated as 1. \u201cDEFAULT\u201d, and accordingly, can IBC default and admitted the application filed by the proceedings be initiated. OC. Aggrieved with the Order of the Adjudicating Authority, an appeal was preferred. Hearing the Appeal82, the Appellate Tribunal, held that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (\\\"IBC\\\") CANNOT be admitted over defaults relating to non-payment of TDS (Tax Deduction at Source) amount. Whether \u201cTime Barred Salary\u201d is an On an Application83 filed by the ex-Director of the 2. \u201cOperational Debt\u201d and non payment of the Corporate Debtor for claim of unpaid salary, the same constitutes \u201cDEFAULT\u201d, and accordingly, NCLT held that the non payment of salary, to be can IBC proceedings be initiated. treated as default and admitted the application filed by the OC. The NCLT viewed that the Application of the OC was not time barred. On Appeals84 by a group Company and the suspended Director of the Corporate Debtor, after going through the documents, the Appellate Tribunal, held that the Adjudicating Authority has not addressed either to the question of claims having been time barred nor 81 CP.(IB)\/1686(KB)\/2018, NCLT, Kolkata Bench (Masters 83 CP.(IB)-529\/ND\/2021, NCLT, Delhi Bench (Anil Agarwal vs. Development Management (India) Pvt. Ltd., vs. Bellagio Omega Icehill Private Limited) Projects Private Limited. 84 Company Appeal (AT) (Insolvency) No.194 of 2022, NCLAT, 82 Company Appeal (AT) (Insolvency) No. 274 of 2022, NCLAT, New Delhi New Delhi (Amitabh Roy v Master Development Management (India) Pvt. Ltd) Volume -109 August -2023 70 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. to the issue of the existence of a \u2018Pre-Existing Dispute\u2019 between the parties. Accordingly, set- aside the orders of the Adjudicating Authority. Accordingly, a Time barred Salary cannot constitute \u201cDEFAULT\u201d, and accordingly, proceedings cannot be initiated against the Corporate Debtor under IBC. 3. Whether \u201cGratuity Payment\u201d is an Applicant worked as an employee of the \u201cOperational Debt\u201d and non payment of the Corporate Debtor and attained superannuation same constitutes \u201cDEFAULT\u201d, and accordingly, on 31.10.2016 and an amount of Rs. 16.80 lakhs can IBC proceedings be initiated which includes gratuity, EL Encashment, LTC was payable to the Appellant by the Corporate Debtor but the same was not paid. The NCLT85 rejected the Application, and dismissed the Section 9 Application, as they do not constitute \u201cOperational Debt\u201d. Aggrieved with the Order of the Adjudicating Authority, an appeal was preferred by the OC. Hearing the Appeal86, the Appellate Tribunal, while categorizing the dues out of service in two categories namely \\\"service claims\\\" which includes salary, wages, bonus and \\\"Welfare Claims\\\" which arise after the cessation of employment such as gratuity, leave encashment, superannuation dues which will be dependent on the tenure of the employment. It further held that though 'service benefits' like 'LTC' accrue, on account of the service rendered 85 C.P. (IB) No. 1060\/MB\/2019, NCLT, Mumbai Bench (Kishore K Lonkar vs. Hindustan Antibiotics Ltd) 86 Company Appeal (AT) (Insolvency) No. 934 of 2021 (Kishore K Lonkar vs. Hindustan Antibiotics Ltd) 71 | P a g e Volume -109 August -2023","Important aspects in IBC Law - Revisited through recent judgements. during the period of employment, the scope and objective of the Code is simply not just for recovery of 'dues' but Resolution of the Companies meant for 'maximization of the value of assets', to promote entrepreneurship, availability of credit and balance all interest of the stakeholders. The Appellate Tribunal in that these claims can be filed before the Resolution Professional after the initiation of CIRP, but it is not the intent and objective of the code to put the Corporate Debtor in to CIRP, on the ground of non-payment of LTC and EL Encashment, and dismissed the Appeal. Whether \u201cSalary during Notice period\u201d, is an Applicant was employed as CFO of the Corporate 4. \u201cOperational Debt\u201d and non payment of the Debtor Company. same constitutes, \u201cDEFAULT\u201d, and accordingly, can IBC proceedings be initiated? On 14.11.2019, the Operational Creditor resigned from the job prior to Board meeting and the Notice Period to be served ends on 12.02.2020. The Operational Creditor despite sending several e-mails seeking dues owed by the Corporate Debtor, the Corporate Debtor failed to respond. There was notice period of 2 months. On being not paid the salary for the notice period, the Applicant filed an Application87 before the Adjudicating Authority, under Section 9 of the Insolvency and Bankruptcy Code, 2016 (\\\"IBC\\\") for resolution of salary of 02 months for the purported notice period. 87 C.P.(IB)-678(MB)\/2020, NCLT, Mumbai Bench. Volume -109 August -2023 72 | P a g e","Important aspects in IBC Law - Revisited through recent judgements. The perusal of the documents, submitted and the going through legal position, the Adjudicating Authority was opinion that the claim does not fall under the definition of \u201cOperational Debt\u201d as it was not for the salary for the actual work done by the Operational Creditor. Therefore, this Bench is of the considered opinion that the remedy of the Operational Creditor is to initiate necessary legal proceedings for recovery before appropriate legal forum and not through the route of IBC. 73 | P a g e Volume -109 August -2023","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group In the wake of SEBI and NFRA investigation into the Caf\u00e9 coffee day group for the lapses in the corporate governance and audit aspects it is important to understand the reliance placed on the corporate governance and the responsibility of the management and the auditors to ensure the compliance of it. In this article let us understand the findings of the SEBI investigation on the Coffee Day Enterprises Limited (CDEL) and the NFRA investigation on the Auditors of the Caf\u00e9 coffee day group making them responsible for the irregularities identified. -Contributed by CA Anand Raj & CS D V K Phanindra [email protected] 1. Corporate Governance is a vital aspect of modern importance, the Organisation for Economic Co- business that ensures transparency, operation and Development (OECD) has accountability, and responsible decision-making formulated Principles88 of Corporate Governance, within organizations. It refers to the system by to help policy makers evaluate and improve the which companies are directed and controlled, legal, regulatory, and institutional framework for involving the balance of interests among various corporate governance, with a view to supporting stakeholders such as shareholders, management, economic efficiency, sustainable growth and customers, suppliers, financiers, government, financial stability. and the community. An effective corporate governance framework is the bedrock of ethical 3. On one hand while discussing the importance of conduct, sustainable growth, and long-term Corporate Governance and the regulators putting success for companies, fostering investor all sorts of checks and balances to ensure confidence and strengthening the overall transparency, accountability, and responsible economic system. It is needless to discuss in decision-making takes place in the organizations, detail the importance of Corporate Governance. the other-side of the coin has many instances of serious lapses of transparency in operations and 2. With the business going global, transparency, lack of accountability towards the stake holders. accountability is required on a multi-fold level, and in view of its importance, many initiatives 4. Corporate Governance and Sustainability are have been brought by the Securities Regulator in interrelated. An ethically driven governance India, SEBI. In view of the having such greater 88https:\/\/www.oecd.org\/corporate\/ca\/Corporate- Volume -109 August -2023 Governance-Principles-ENG.pdf 74 | P a g e","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group framework enhances a company's ability to Statutory Auditors, in accordance with the integrate sustainability practices into its powers vested under Section 132 (4) of the operations. Sustainable business practices aim to Companies Act, 2013. balance environmental, social, and economic factors, thereby creating long-term value for all Introduction stakeholders. Any manner of slackness results in enrichment of a few, loss of value to the 7. CDEL is the parent company of Coffee Day Group. stakeholders, and irreparable damage to the The Company, primarily through its subsidiaries, image of the Entity as well as the Economy as a associates and joint venture companies, does whole. For the lenient attitude in discharging of business in multiple sectors such as coffee retail the Statutory duties by the Professionals, they are and exports, leasing of commercial office space, unnecessarily termed as being hand-in-glove with financial services, Integrated Multimodal the Management, and are robbed into Logistics, Hospitality and Information Technology investigations. (IT) \/ Information Technology Enabled Services (ITeS). 5. Sector specific regulators take stalk of the 8. The downfall of Coffee Day Enterprises Limited situation in respect of the Companies and (CDEL), started following the tragic suicide of its Corporates, flouting the regulations. Now, with Chairman, Mr. V.G. Siddhartha (for brevity 'VGS'), the advent of National Financial Reporting in July 2019, and his suicide note that he was in Authority (\u201cNFRA\u201d), and it being vested with deep debt, sparked a series of investigations by powers, the Professionals have been cast up on the Company on its own and also by the Regulator the duty to discharge their Audit services in a Authorities. Both SEBI and NFRA conducted more responsible manner. comprehensive inquiries into the diversion of funds from CDEL group to MACEL, an entity 6. Having discussed the position of the law, let us owned by the promoters of CDEL. now proceed in this article, to briefly analyse the lapses found during the investigation conducted SEBI Order on CDEL: by Securities and Exchange Board of India (SEBI), in connection with the diversion of funds among Background and Investigation: to Rs.3,535 crores from Seven (07) subsidiary companies of Coffee Day Enterprises Limited (for 9. SEBI initiated a suo moto investigation, to brevity 'CDEL'), a listed company to Mysore ascertain any diversion of funds to related entities Amalgamated Coffee Estate Limited (for brevity which resulted in possible violation of provisions 'MACEL'), an entity owned and controlled by the of SEBI (Prohibition of Fraudulent and Unfair promoters of CDEL, and as a consequence, the Trade Practices Relating to Securities Market) investigations conducted by NFRA, against the Regulations, 2003 (for brevity \u201cPFUTP Regulations\u201d) and \/or SEBI (Listing Obligations 75 | P a g e Volume -109 August -2023","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group and Disclosure Requirements, Regulations, 2015 10. The SEBI order89 on CDEL was a result of an (for brevity \u201cLODR Regulations\u201d). The following extensive investigation into the diversion of funds are the brief findings of the Investigation. amounting to Rs.3,535 Crores from Seven (07) of its subsidiaries to MACEL, as per the details A. Diversion of Funds: below: Sl. Name of the Subsidiary of CDEL Rupees in Crores No. Outstanding Dues from MACEL 1. Coffee Day Global Limited 2. Tanglin Retail Reality Developments Private As on 31.03.2019 As on 31.07.2019 65 1,112 Limited 789 1,050 3. Tanglin Developments Limited 4. Giri Vidhyuth (India) Limited -12 620 5. Coffee Day Hotels and Resorts Private Limited - 370 6. Coffee Day Trading Limited - 155 7. Coffee Day Econ Private Limited - 125 - 103 Total 842 3,535 11. The investigation brought to light that late VGS, the Chairman of CDEL, was instrumental in making decisions to transfer these funds. The diverted funds were then routed to entities related to VGS and his relatives, leading to suspicions of fraudulent activities. 89SEBI Final Order No. WTM\/ASB\/CFID\/CFID_1\/23008\/2022- Volume -109 August -2023 23; Dt: 24.01.2023 76 | P a g e","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group 12. A Pictorial90 presentation of the money trail from CDEL to MACEL and further down flow, is as below: 13. During the course of investigation, it was informed by MACEL that a total of Rs. 384.12 crores was transferred from MACEL to VGS and related parties, which can be seen in the second stage of flow of funds from MACEL, in the picture above. 14. However, based on independent analysis of bank statements of MACEL done by SEBI with the information provided by CA Lavitha Shetty (Auditor of MACEL), SEBI observed that the outstanding balances from VGS and his related entities to MACEL as on July 31, 2019, were much higher than what were informed by MACEL. 90 Source-SEBI Final Order No. WTM\/ASB\/CFID\/CFID_1\/23008\/2022-23; Dt: 24.01.2023 Volume -109 August -2023 77 | P a g e","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group 15. A Pictorial91 presentation of the money trail from MACEL to VGS and his related entities is as below: B. Impact on Share Price: Practices (PFUTP) Regulations, attributing the fall in the Share Price to the news of Mr. V.G. 16. SEBI's investigation also analysed the impact of Siddhartha's demise. However, SEBI deemed the fund diversion on the price movement of these explanations as unsatisfactory and held CDEL's scrip. The news of death of VGS and the CDEL accountable for the fund diversion. involvement of the Coffee Day family in the financial transactions became public knowledge, Order: resulting in a significant decline in the share price of CDEL and causing substantial losses to 19. SEBI held that CDEL's actions amounted to investors. manipulative, fraudulent, and unfair trade practices, thereby violating Regulation 4(1) of the C. Violation of Related Party Transaction Norms: PFUTP Regulations and LODR Regulations. SEBI Ordered (a) for recovery of the entire amounts 17. Allegations made by SEBI against CDEL on this from MACEL and its related entities, along with front were due interest, were ordered, and in this regard directed CDEL to appoint a Law firm, in 1. Violations of Related Party Transaction consultation with NSE, to take effective steps for norms, recovery of the monies; (b) imposed a penalty of Rs. 25 Crore for fraudulent and unfair trade 2. Failure to obtain necessary approvals for practices, and Rs.1 Crore for violations of listing transactions with MACEL, and regulations, to be paid within 45 days. Moreover, SEBI emphasized the necessity to investigate the 3. Non-compliance with Listing Obligations roles of directors and key management personnel and Disclosure Requirements (LODR) in the fund diversion. Regulations. 18. CDEL refuted the allegations of violating the Prohibition of Fraudulent and Unfair Trade 91 Source-SEBI Final Order No. WTM\/ASB\/CFID\/CFID_1\/23008\/2022-23; Dt: 24.01.2023 78 | P a g e Volume -109 August -2023","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group 20. Following the investigation by SEBI, NFRA also In the matter of CDGL - For FY 2018 \u2013 2019 & initiated investigation under Section 132 (4) of 2019 \u2013 2020: the Companies Act, 2013, into the Professional Conduct of the Statutory Auditors of the 21. The NFRA orders exposed several lapses and Subsidiary entities of CDEL, involved in the sham failures in the audit conducted by M\/s. ASRMP & transactions, as below: Co., Chartered Accountants and the Auditors. The auditors were broadly charged with non- 1. Coffee Day Global Limited (CDGL), compliance with independence requirements by 2. Mysore Amalgamated Coffee Estate having audit and non-audit relationships which resulting in conflict of interests, tampering with Limited (MACEL), and the audit file, failure to detect fraudulent 3. Tanglin Developments Ltd. (TDL) transactions, and lack of competence and due 4. Giri Vidyuth India Ltd. (GVIL). diligence. The auditors' inadequate response to the charges led to penalties and debarment from NFRA Orders: acting as auditors for specified periods, as below: Penalty for the FY 2018 - 201992 On the Audit Partner (3 No.s) On the firm \u2022 Penalty of Rs.1 Crore on the firm; \u2022 Penalty of Rs.10 Lakhs on CA A.S. Sundaresha; Rs.5 \u2022 Debarment for a period of Two Years from being Lakhs each on CA Madhusudhan UA and CA appointed as Auditor or Internal Auditor or from Praanav G Ambedkar; undertaking Audit in respect of the Financial \u2022 Debarment for a period of Five Years from being Statements or internal audit of the functions and appointed as Auditor or Internal Auditor or from activities of any company or body corporate. undertaking Audit in respect of the Financial Statements or internal audit of the functions and activities of any company or body corporate. 92 Vide Order No. NF-23\/14\/2022; Dt: 12.04.2023 Volume -109 August -2023 79 | P a g e","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group Penalty for the FY 2019 - 202093 On the firm On the Audit Partner (2 No.s) \u2022 Penalty of Rs.2 Crore on the firm; \u2022 Penalty of Rs.10 Lakhs on CA A.S.Sundaresha; Rs.5 \u2022 Debarment for a period of Four Years from being Lakhs on CA Madhusudhan. appointed as Auditor or Internal Auditor or from \u2022 Debarment for a period of Ten Years in case of CA undertaking Audit in respect of the Financial A.S.Sunderesha; and Five years in case of CA Statements or internal audit of the functions and Madhusudhan U A, from being appointed as activities of any company or body corporate. Auditor or Internal Auditor or from undertaking (The debarment of 2 years as ordered in the order for Audit in respect of the Financial Statements or the non-compliance in the financials for the FY 2018 internal audit of the functions and activities of any \u2013 2019, shall run concurrently.) company or body corporate. (The debarment of 5 years as ordered in order for the non-compliance in the financials for the FY 2018 \u2013 2019, in respect of CA A.S.Sundaresha, shall run concurrently. In the matter of MACEL - for FY 2018 \u2013 201994: \u2022 Debarment for a period of Five Years from being appointed as Auditor or Internal Auditor 22. The NFRA order highlighted major lapses in the or from undertaking Audit in respect of the audit conducted by another auditor. The lapses Financial Statements or internal audit of the included failure to detect and report fraudulent functions and activities of any company or diversion of funds, misstatements in financial body corporate. statements, and violations of auditing standards and the Companies Act. Wrong reporting that For FY 2019 \u2013 202095: MACEL was not required to obtain NBFC Licence under Section 45 IA, through the activities of 23. This Order of NFRA presented additional audit MACEL changed from Coffee business to NBFC lapses and professional misconduct charges activities, on account of diversion of funds. The against the Auditor. The Auditor failed to detect auditor's lack of due diligence and professional and report fraudulent diversion of funds, judgment resulted in penalties and debarment, misstatements, and inappropriate recognition of for specified periods, as below: finance costs and cash flow in the financial \u2022 Penalty of Rs.5 Lakhs on CA Lavitha Shetty; statements. The Auditors lack of due diligence, professional judgment, and compliance with 93 Vide Order No.24\/2023; Dt: 28.07.2023 94 Vide order NO.NF-23\/14\/2022; Dt: 13.04.2023 95 Vide order No.NF-23\/14\/2022; Dt: 25.04.2023 80 | P a g e Volume -109 August -2023","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group auditing standards resulted in violations of the or from undertaking Audit in respect of the Companies Act and SA 700. Additionally, the Financial Statements or internal audit of the Auditor was charged with various non- functions and activities of any company or compliances, including failures in internal body corporate. (The debarment of 5 years as financial control, related party disclosures, and ordered in the order Dt: 13.04.2023, for the auditing standards. The Auditors defence was non-compliance in the financials for the FY rejected as unsatisfactory, leading to penalties 2018 \u2013 2019, shall run concurrently.) and debarment from acting as an auditor for ten years. The Audit Firm, represented by CA Lavitha In the matter of TDL - For the FY 2018 - 201996: Shetty, was also held accountable for non- compliance with quality control standards. The 24. The Order of NFRA revealed significant lapses in following penalties were levied in connection the audit conducted by M\/s. Sundaresha & with the FY 2019 \u2013 2020: Associates. The auditors were accused of failing to comply with auditing standards, identify \u2022 Penalty of Rs.10 Lakhs on CA Lavitha Shetty; fraudulent transactions, and report material misstatements. The auditor's lack of due diligence \u2022 Debarment for a period of Ten Years from and compliance led to penalties and debarment being appointed as Auditor or Internal Auditor for the periods as detailed below: On the firm On the Audit Partner \u2022 Penalty of Rs.1 Crore on the firm; \u2022 Penalty of Rs.5 Lakhs on CA C. Ramesh. \u2022 Debarment for a period of Two Years from being \u2022 Debarment of CA C. Ramesh, for a period of Five appointed as Auditor or Internal Auditor or from years from being appointed as Auditor or Internal undertaking Audit in respect of the Financial Auditor or from undertaking Audit in respect of the Statements or internal audit of the functions and Financial Statements or internal audit of the activities of any company or body corporate. functions and activities of any company or body corporate. In the matter of GVIL - For the FY 2019 - 202097: funds from the subsidiary to MACEL. The auditors' failure to identify red flags and report fraudulent 25. The NFRA order on GVIL, exposed a series of activities resulted in severe financial lapses and failures in the audit conducted by M\/s consequences for the company and its Sundaresha & Associates. The auditors' lack of shareholders. The Order also noted the failure on due diligence, professional judgment, and the part of the Auditor to assess independence, compliance with auditing standards played a tampering with the Audit file, inadequate significant role in the fraudulent diversion of 96 Vide order No.NF-23\/14\/2022; Dt: 26.04.2023 97 Vide order No.NF-23\/14\/2022\/05; Dt: 30.05.2023 Volume -109 August -2023 81 | P a g e","Lapses in Corporate Governance & Auditing Ethics in \u2018Caf\u00e9 Coffee Day\u2019 group verification of the related party transactions, penalties were levied on the Auditors and the Failure to Assess Risk of Material Misstatement, Firm. Lack of Due Diligence in Loan Audit. The following On the firm On the Audit Partners (2 No\u2019s) \u2022 Penalty of Rs.1 Crore on the firm; \u2022 Penalty of Rs.5 Lakhs each on CA C. Ramesh and \u2022 Debarment for a period of Two Years from being CA Chaitanya G. Deshpande. appointed as Auditor or Internal Auditor or from \u2022 Debarment of CA C. Ramesh and CA Chaitanya G. undertaking Audit in respect of the Financial Deshpande, for a period of Five years from being Statements or internal audit of the functions and appointed as Auditor or Internal Auditor or from activities of any company or body corporate. undertaking Audit in respect of the Financial Statements or internal audit of the functions and (The above debarment shall START AFTER THE activities of any company or body corporate. COMPLETION OF THE debarment of 2 years as ordered in the order for the non-compliance in the Note: The order does not provide any clarity financials of TDL for the FY 2018 \u2013 2019). So not regarding whether the above debarment of CA C. concurrent. Ramesh, in GVIL is concurrent with the debarment with the Order in TDL for the FY 2018 \u2013 2019, or will start after the completion of the debarment therein. Conclusive Remarks: Only through such collective efforts and implementation of the Corporate Governance 26. The SEBI and NFRA orders on CDEL and its principles, in word and spirit, can India's financial subsidiaries provide valuable insights into the markets thrive, implant confidence among lapses and deficiencies in corporate governance investors, and ensure the protection of public and auditing ethics. The investigations have interest. The regulatory actions taken against CDEL exposed fraudulent activities and non- and its auditors serve as a powerful reminder of the compliance with regulations, leading to severe importance of integrity, professionalism, and penalties and debarment for the involved parties. adherence to ethical standards in the financial These orders are a serious wake-up call that the world. As the nation aims for sustainable growth corporates and the Auditors embrace and to and development, these orders set a precedent for strengthen governance practices, enhance accountability and responsible conduct in transparency in financial reporting, and prioritize corporate affairs and auditing practices. ethical conduct. 82 | P a g e Volume -109 August -2023","Summary of GST Decisions Summary of GST Decisions Gujarat High Court in the case of Tagros on the technical or procedural lapse. Further it Chemicals Pvt. Ltd. 98 - Denial of refund on the was held that the substantial benefit available to ground of procedural lapse: the petitioner cannot be denied on the technical defects where the said error has happened 1. In this case, the petitioner has supplied the goods mistakenly. Hence, the Honourable High Court to the merchant exporter by availing the benefit has set aside the impugned order and order for NN 41\/2017 \u2013 IT (R). However, while disclosing refund of the same. the same in the GST returns, the petitioner has mistakenly reported the said invoice with the Jharkhand High Court in the case of Ambey actual rate instead of the concessional rate and Mining Pvt. Ltd.99 \u2013 Issue of show cause notice the tax was paid accordingly. Later the petitioner for the same cause of action where the matter identified the error and issued the credit note for has already attained finality: the same and applied for refund of excess payment of tax. 4. In this case, the petitioner has delayed the filing of returns and the interest on such delayed 2. The respondent has denied the refund of tax on payment of tax has been discharged. The tax the ground that the petitioner has failed to authorities has issued the show cause notice comply with the conditions mentioned therein demanding the tax on the delayed filing of return the notification. However, the goods supplied by but not on late payment of tax. Thereafter, the the petitioner has exported to place outside India said authorities has passed the order confirming within the 90 days from the date of issue of the said demand. The petitioner has filed an invoice. The petitioner has filed the instant appeal appeal against the impugned order before the against the impugned order praying the same to first appellate authority and got the favourable be set aside and to grant the refund excess order. payment of tax. 5. Later on, another wing of the tax authorities has 3. On hearing both parties, the Honourable High issued fresh show cause notice for the same cause Court held that the conditions mentioned therein of action demanding the interest for the same has to be complied by the exporter not the period (for which the matter has been petitioner in the given case. Hence, rejection of adjudicated and attained the finality). The refund on merely not complying with the other petitioner challenged the jurisdictional legality conditions of the said notification is a procedural and authority of office in issuing the said show lapse and the said refund cannot be denied solely cause notice. 98 2023-VIL-460-GUJ 99 2023-VIL-455-JHR August -2023 Volume -109 83 | P a g e","Summary of GST Decisions 6. The petitioner in his pleading contended that the matter to lower authority, to bypass the embargo issuing of show cause notices for same cause of of the law, the tax authority has issued the fresh action for which the finality has been attained is proceedings for the same issue which has wholly without jurisdiction and bad in law and the attained finality. The actions of authority in the procedure and is also against the principles of res said case are clearly to start afresh proceedings of judicata. the same issue which is bad in law, and it is without jurisdiction and the same has been hit by 7. The authorities contended that the first show the principles of res judicata. Accordingly, the said cause notice was issued while scrutinising by the show cause notices have been quashed and set returns by the department and accordingly the aside and allowed the instant writ application. order was passed under the Section 73 of the CT Act. Whereas the form in which the notice was Gujarat High Court in the case of Shree Renuka issued was of different section. Accordingly, the Sugars Ltd100. \u2013 Refund was short claimed due to Appellate Authority reviewed the matter and clerical mistake and the supplementary refund issued the show cause in relevant form. Later, this claim for the same period was not sustainable: whole exercise is carried and taken over by the different jurisdiction and they have issued a fresh 10. The petitioner has been regularly filing the refund show cause notice. Further, they also contended of unutilised ITC with the department for various that the simultaneous proceeding before two periods and the same got sanctioned by them at authorities for the same period was an regular intervals. However, in the period involved administrative oversight. in the dispute, the petitioner has filed the refund claim shorter than the actual amount that can be 8. After hearing both parties, the Honourable High claimed (as per the relevant provisions of CT Act) Court held that the first appellate order passed by due to clerical mistake. After knowing the fact of the relevant authorities has become final on the short claimed, the petitioner has filed the refund ground that the respondent has not challenged claim under \u2018any other\u2019 category instead of the said order within the given time limit before \u2018refund of accumulated ITC in respect of export of the next forum, and the same was not subject to goods without payment of tax\u2019, as the said review by the revisional authority. Since the category is not available again while filing the stipulated time to appeal has lapsed, it deemed supplementary claim relating to the impugned that the authorities has agreed to the said order. period in the GST Portal. 9. Further, the High Court also stated that since the 11. The supplementary refund got rejected on the first appellate authority cannot remand back the ground that they have filed the refund of unutilised ITC in wrong category. The petitioner in 100 2023-VIL-439-GUJ Volume -109 August -2023 84 | P a g e","Summary of GST Decisions his pleading also contended that the said category refund cannot be rejected and also there is no was chosen due to unavailability of option in the resort available to the petitioner to file the portal and respondent without going into the application except under \u2018any other\u2019 category. facts of the case rejected the refund claim of the Further, Court by referring to various case laws petitioner. held that if the substantive conditions have been satisfied, the refund cannot be rejected on the 12. In response, the respondent contended that the technical error. Due to the said fact, the petitioner common portal calculates the refund amount as is eligible to claim the refund due to such per the formula prescribed in the relevant technical factor and accordingly Court allowed provisions. As the per the said formula, the this writ petition and ordered the respondent to petitioner can claim the higher refund amount grant the refund manually. but claimed less than that and the same happens to be the petitioner choice and accordingly they Delhi High Court in the case of Shri Radhey are responsible for the same. Further, he also Traders102 \u2013 Registration cancelled for not filing referred to the Circular101 and contended that returns for continuous period of six months with when the refund of unutilised ITC can be claimed retrospective effect: under \u2018any other\u2019 category when the registered person has inadvertently filed \u2018Nil\u2019 application. 14. In the present case, the petitioner has filed the However, in this case, the petitioner has filed the application for cancellation of registration for original claim and the same does not amounts to which respondent has not responded for 9 \u2018Nil\u2019 application. Hence, the petitioner claim has months and thereafter he issued a notice seeking been rightly rejected by the respondent. for additional documents and after that, the respondent has rejected the cancellation of 13. After hearing both parties, the Honourable High registration application. After said rejection of Court held that, the refund amount means the application, the petitioner filed the second maximum amount that is admissible as per the application for cancellation of registration for provisions. However, in the present case, the which the respondent has dealt this application as respondent has not disputed the said fact but similar as first application and issued a notice for contended that the petitioner is responsible for requiring the additional information from the claiming the lower amount as refund. In addition, petitioner. Since, the petitioner business has court held that the said option chosen by the closed long back and could not provide the petitioner is solely due to unavailability of option additional information within the given time, the in the portal and the same happens to be a respondent has rejected the application on technical error. Due to such technical error, the ground that he was not responded to the said notice. 101 Circular No. 110\/29\/2019 \u2013 GST dated 03.10.2019. 102 2023-VIL-476-DEL August -2023 Volume -109 85 | P a g e","Summary of GST Decisions that, there no other material record to justify why registration has cancelled with retrospective 15. Later, a notice was issued to show cause why the effect. Further, there is no dispute regarding the registration should not be cancelled for not filing filing of returns by the petitioner. Since, the returns for a continuous period of six months. petitioner has closed hid business in June 2019, After the said notice, the registration has the petitioner should not be forced to file the cancelled with retrospective effect from the returns for the period which he had closed his registration date. Aggrieved by the said order, the business. Further, the Court held that concerned petitioner has filed for revocation of registration authority has not applied the mind to the and got it restored. However, the concern of petitioners assertion and order passed by the petitioner was not addressed in the said order as adjudicating authority is belatedly and in a why the said registration is cancelled with mechanical manner. Accordingly, the Court retrospective effect. The petitioner has filed the ordered to process the cancellation of present writ petition on impugned order which registration from the date of closure of business cancelled the registration with retrospective based on the information provided by the effect. petitioner. 16. In the said case, the Honourable High Court held 86 | P a g e Volume -109 August -2023","Summary of Income Tax Decisions Delhi High Court in the case of Polyplex is eligible for credit when determining the Indian Corporation Ltd.103 \u2013 FTC shall be available to the tax liability. The term 'Thai tax payable' includes Indian assessee to the extent of Thai tax payable, both the tax payable under the Thai Revenue even when the tax is not actually paid due to any Code and the tax that was exempted or reduced exemption available in Thailand. under the provisions of the Investment Protection Act of Thailand. In this case, the dividend income 1. The case involve an Indian company receiving received by the company was exempted under dividend income from its subsidiary in Thailand. the Investment Protection Act of Thailand for While calculating the Indian tax liability on its specific individuals engaged in promoted income, the company claimed credit for the tax activities. Consequently, the company had not payable in Thailand which was not the actual tax paid any tax in Thailand on the dividend income. paid on account of exemption. The main question before the Hon\u2019ble Delhi High Court was whether 4. The revenue authority argued that as there is no the company could be eligible for the Foreign Tax real tax payment in Thailand, the FTC cannot be Credit (FTC) on the tax that was not actually paid claimed to the amount of tax payable, potentially in Thailand. resulting in double non-taxation. However, the court has ruled that this situation does not result 2. The court, in this case, interpreted the concept of in double non-taxation but is instead considered tax sparing. Tax sparing measure goes beyond the a tax sparing measure aimed at promoting the traditional FTC approach which provides that, economic development of the country. when a taxpayer from one country earns income Additionally, the term 'Thai tax payable' was in another country, the residence country grants already defined in the DTAA itself, as mentioned a tax credit for the tax that would have been above. Therefore, it was decided that the payable in the source country, even such income taxpayer is entitled to claim the FTC on the tax is exempt in the source country. The residence amount that was not actually paid. country will still grant the tax credit in the cases where no tax was paid by virtue of tax incentives Our Comments: or exemptions provided by the source country to 5. In the globalized economy, countries are adopting promote foreign investment. measures to facilitate foreign investment by 3. In this particular situation, Article 23 of the Indo- reducing entry barriers and offering incentives. Thai Double Taxation Avoidance Agreement One such measure is the concept of tax sparing, (DTAA) stipulates that the tax payable in Thailand which is a credit method that countries mutually 103 [2023] 152 taxmann.com 479 (Delhi) Volume -109 August -2023 87 | P a g e","accept when executing tax treaty agreements. that the MFN clause's benefit is only applicable However, the Indo-Thai DTAA was amended in when there is a separate notification from the 2015 and the tax sparing measure was excluded Government of India to extend treaty benefits. from that date. Hence, any tax agreements made Based on this argument, the revenue contended post 2015 cannot avail the tax sparing measure that the MFN clause in the Indo-Spain DTAA while claiming the FTC. would not apply without a specific notification. Kolkata Tribunal in the case of TDK India Private 9. The Tribunal's decision highlighted that, in case of Limited104 - Protocol to DTAA is integral and conflict, the provisions of the statutory act take indispensable, hence the notifying the MFN by precedence over circulars or notifications. CBDT is not a mandatory prerequisite. Additionally, neither Section 90 of the IT Act nor the DTAA necessitates a CBDT notification for 6. The Kolkata Tribunal has deliberated whether the extending the benefits of the MFN clause. protocol to the DTAA applies without CBDT's According to Section 90 of the IT Act, the notification to extend the benefits of the Most provisions of either the IT Act or the DTAA that Favoured Nation (MFN) clause. Additionally, the are favorable to the assessee apply. Therefore, court examined whether the specified treaty rate since the provisions of the Indo-Spain DTAA, includes surcharge and cess or requires separate along with the protocol extending the MFN clause charging. benefit, favor the assessee in this case, they can avail the benefit without a CBDT notification, as 7. The assessee received professional services from the protocol is an integral part of the DTAA. a Spanish company which is chargeable to tax as Consequently, the Tribunal ruled that the FTS. The applicable TDS rate is 20 percent based assessee is eligible for the MFN clause benefit. on Article 13 of the Indo-Spain DTAA. However, para 7 of Article 13 includes a protocol known as 10. Furthermore, regarding the applicable tax rate, it the Most Favoured Nation clause, stating that if is a well-established principle that the tax rate as India enters a treaty with an OECD member per DTAA is inclusive of surcharge and cess. country after 1st January 1990, the TDS rate for Article 2 of the treaty agreements defines the FTS shall follow the lower rate specified in that term 'tax' as the rate specified in the DTAA, treaty. The assessee claims that India has an FTS inclusive of any surcharge. It also encompasses treaty with Portugal, an OECD member, with a 10 any identical or substantially similar taxes levied percent tax rate. Hence, the assessee deducted by the country. The Tribunal, in this case, relied TDS at 10 percent. on its co-ordinate bench ruling in DCIT vs. BOC Group Ltd.106 which clarified that the Education 8. The revenue cited a CBDT circular105 indicating 104 [TS-393-ITAT-2023(Kol)] 106 64 taxmann.com 386 (2015) (Kol. ITAT) 105 CBDT Circular No. 3\/2022 dt. Feb 3, 2022 Volume -109 August -2023 88 | P a g e","cess, introduced in the Finance Act, 2004, was country. The definition of convertible debentures considered an 'additional surcharge' on the tax in the circular cannot be applied in other contexts rate. Consequently, by applying these for income tax purposes, such as interest considerations, it was concluded that the rate as allowance on pre-conversion debentures or per DTAA, i.e., 10 percent, shall include surcharge granting voting rights before conversion. and cess. 14. The Tribunal emphasized that the nature of Delhi Tribunal in the case of Religare Finvest securities, whether debentures or equity, should Ltd107 - Compulsory Convertible Debentures are be determined at the time of interest\/dividend termed as debt instruments until conversion payment. In this case, since the securities were into equity and hence, interest is allowed. still debentures and had not been converted into equity, the payment was considered as interest. 11. The case revolves around an assessee company Further, the law does not prohibit the allowance that issued Compulsory Convertible Debentures of interest as a revenue expenditure. Therefore, (CCDs) to its Indian parent company. These CCDs the Tribunal ruled in favor of the assessee, would be converted into equity after a specified allowing the payment of interest on CCDs as a period. The company claimed the interest paid on revenue expenditure. the CCDs as an expenditure. 12. On the other hand, the revenue argued that Our Comments: because the debentures were mandatorily 15. Numerous courts and tribunals have issued converted into equity at a predetermined rate, they should be considered as equity, and the various rulings regarding the classification of interest paid should be treated as a dividend. interest payments on CCDs as revenue Therefore, it should not be allowed as revenue expenditure or dividends. Treating such expenditure for the company. The revenue relied payments as dividends based on the mentioned on RBI circular no. 74 dated June 8, 2017, which RBI circular would create ambiguity, especially stated that CCDs with mandatory conversion concerning whether these debentures hold options should be treated as equity. voting rights equal to equity shares. It is crucial that the treatment of income\/expense based RBI 13. However, the Tribunal clarified that the RBI norms cannot be made when the RBI circular is in circular does not change the nature of debentures the context of FDI policy to exercise control on into equity. It is only for the purpose of future re-payment obligations in convertible monitoring measures to prevent misuse of the foreign currency and shall be made from the regulatory framework for debt flow in the provisions of Income tax Act when the act itself is clear and unambiguous. 107 [TS-404-ITAT-2023(DEL)] Volume -109 August -2023 89 | P a g e","90 | P a g e Volume -109 August -2023"]
Search
